Broker-Dealer Litigation - Greenberg Traurig LLP

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Hellum v. Breyer, 194 Cal. App. 4th 1300 (2011).
Investors bought unregistered securities and sustained losses. They then brought a class
action lawsuit against the company and its corporate officers based on alleged violations of
California and federal securities laws. The trial court sustained a demurrer and dismissed claims
of securities violations brought against the outside directors. In their complaint, the investors
alleged that the outside directors had the power to influence and control the corporation with
regard to the issuance and sale of unregistered securities. The trial court found that the investors
had not stated a claim against the outside directors because they had not alleged sufficient facts
to show control. The Court of Appeal reversed, holding that director liability under California
Corporations Code Section 25504, does not require pleading and then proving that the director
controlled the primary violator. Rather, the statute expressly subjects outside directors to
collateral liability based solely on their status as directors. As to controlling person liability, the
court found the investors’ allegations of control to be sufficient because the actual exercise of
power did not have to be pleaded because the definitions of “control” focused on the power to
direct, not to exercise. The court found that plaintiffs’ allegations of outside directors’
ownership interests in the company, the responsibility under the company’s bylaws for managing
the company, their presumptive authority to sign key corporate documents (such as regulatory
filings), their significant voting power by virtue of their stock holdings and voting agreement,
and their affiliation with venture capital firms upon which the company relied for its continuing
financing, all supported the inference that they possessed the power to directly or indirectly
influence corporate policies and decision making. Therefore, the court found that the control
person causes of action were sufficient to withstand the defendants’ demurrer.
Moss v. Kroner, 197 Cal. App. 4th 860 (2011).
Plaintiff brought claims against insurance agents under California Corporations Code
Section 25401 and Sections 25504 and 25504.1 for control person liability, based on six
misrepresentations of material fact. The trial court sustained defendants’ demurrer and
dismissed plaintiff’s claims. Plaintiff appealed the trial court’s dismissal. Plaintiff alleged that
defendants materially assisted in the transaction as the issuer’s agents and that they possessed
knowledge of the true facts. In evaluating the control person claims, the court held that
Sections 25504 and 25504.1 expressly extended liability from the original, direct violator of
Section 25401 to specific secondary actors who share equal liability with the original actor.
Specifically, Section 25504 provided that control persons, partners in liable firms, directors, and
principal executive officers of liable corporations, employees of liable actors, broker-dealers, and
agents who materially aid in the violation of Section 25401 are all liable jointly and severally
with and to the same extent as the person who directly violated Section 25401. Accordingly, the
court held that plaintiff stated a viable cause of action for control person liability and reversed
the lower court’s ruling.
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